Bank analysts are getting crushed in Europe — and smaller firms are getting hit the worst

Trista Kelley, provided by

Published
2:33 am CST, Sunday, November 4, 2018

Revenues for banks from European equity research are plummeting in the aftermath of the introduction of MiFID II.

Banks will be earning about 20% less on their European equity research — a drop of about $300 million — by the start of 2019, according to a report from Greenwich Associates.

Under MiFID, a 7,000 page tome that aims to increase transparency on how clients are charged for services, banks must charge separately for research and trading.

LONDON — Bad news for analysts who publish research on European companies: investment banks will be earning about 20% less on their European equity research — a drop of about $300 million — by the start of 2019.

That's according to a report from Greenwich Associates, which attributed the declines to the fallout from new regulations that kicked in this year known as MiFID II. Research budgets are also being slashed. The largest funds in the region cut their budgets for external European equity research by 19% in 2018, and they're planning another 5% to 6% reduction next year.

It's a grim, but not unexpected, outcome from the European law, which kicked in on January 3. Under MiFID, a 7,000 page tome that aims to increase transparency on how clients are charged for services, banks must charge separately for research and trading. (Previously, banks handed out research for free to lure trading commissions.)

While charging separately for research and trading, also known as "unbundling," has won some fans, the reporting costs and requirements are onerous even for giant banks with huge compliance departments. For smaller firms, it's a nightmare.

Just how much is MiFID hurting the little guys? Greenwich released a report on that, too. And surprise, surprise:

"So far, the biggest winners from the industry-changing 'unbundling' regulations have been global bulge-bracket dealers," Greenwich said on September 25. The law has helped catapult big banks even further ahead of their smaller peers. "Global bulge-bracket brokers have clearly increased relative share and impact since MiFID II went live.”

The biggest winners in European equity trading this year: Bank of America Merrill Lynch and UBS, which together lead the market in trading share, followed by JPMorgan, Credit Suisse and Morgan Stanley.

And those firms and their biggest rivals may get an even bigger slice of that commission pie. Their clients, the big investment firms, have been holding back about 30% of their total annual research budget for allocation, Greenwich estimates, meaning that some $300 million in unallocated research budget is up for grabs.

That extra cash "will likely be used to top off and award current providers for additional service throughout the year," the firm said. “With so many hands in a smaller cookie jar, this unallocated budget will be incentive enough for global investment banks to provide exceptional service to their clients.”

But one London fund manager pushed back on this idea, saying that the world of fund management is not unlike the big government bureaucracies, in that if you don't spend your budget, by next year, you lose it.